More share margin benefit

Further reductions in bank funding costs are becoming apparent, mainly in the wholesale market, with the benefits flowing through to bank borrowers and bank owners.

For instance, on Friday, ANZ announced its decision to cut its variable-rate home loans by 27 basis points, the first time the bank has reduced rates by more than the Reserve Bank of Australia's target cash rate since adopting its new system of rate reviews at the end of 2011.

National Australia Bank's CEO, Cameron Clyne, told the Financial Review that the bank would consider out of cycle rate cuts where warranted by lower funding costs.

The RBA, in its quarterly statement of monetary policy released on Friday, said that average funding costs on banks' outstanding liabilities were estimated to have been broadly unchanged since early February, despite a further reduction in wholesale market spreads.

It said that, to date, "the fall in the cost of issuing long-term bonds has had only a limited impact on banks' outstanding long-term wholesale funding costs."

In wholesale debt markets, the RBA estimated that the major banks' unsecured and covered bond spreads relative to Commonwealth government bonds declined by 10 bps to 20 bps over the last quarter.

The RBA noted that secondary market spreads are 140 bps to 120 bps lower than at the peak of concern about European sovereign debt in the middle of 2012, while unsecured spreads are now close to their lowest level since the start of the global financial crisis.

Issuance spreads on the mortgage-backed bond tranches have declined by around 30 bps since late last year, with recent deals priced at the lowest spreads since the early stages of the GFC.

These trends may already be improving. As reported below, margins in wholesale debt markets fell even further last week.

The RBA said that strong competition for deposit funding continued over the past quarter, though banks' pricing tactics in the deposit market shifted.

It said a number of banks had reduced the premium offered on some term deposit specials, while "since the middle of 2012, there has been a noticeable reallocation away from term deposits and towards at-call savings deposits."

The RBA said this "predominantly reflects the relatively higher interest rates offered on some at-call savings accounts, particularly bonus saver accounts, compared with term deposits. Given the relatively fast repricing of these products, developments in the deposit market have a more immediate effect on overall funding costs than developments in wholesale funding markets."

The RBA highlighted that while "deposit costs continued to weigh on margins, most banks reported an increase in their domestic net interest margins reflecting the effects of loan repricing."

Banks are sharing some of this benefit with investors in the form of special dividends and higher dividend payout ratios.